U.S. Department of
Justice

Former Chairman of Taylor, Bean & Whitaker Sentenced to 30 Years in Prison and Ordered to Forfeit $38.5 Million

WASHINGTON – The former chairman and owner of Taylor, Bean & Whitaker
(TBW) was sentenced today to 30 years in prison
and ordered to forfeit approximately $38.5 million
for his role in a more than $2.9 billion fraud scheme that contributed
to the failure of TBW and Colonial Bank. At one time, TBW was
one of the largest privately held mortgage lending companies
in the United States and Colonial Bank was one of the 25 largest
banks in the United States.

Lee Bentley Farkas was sentenced today by U.S. District
Judge Leonie M. Brinkema in the Eastern District of Virginia.
The sentence was announced by Assistant Attorney General Lanny
A. Breuer of the Criminal Division; U.S. Attorney Neil H. MacBride
for the Eastern District of Virginia; Acting Special Inspector
General Christy Romero for the Troubled Asset Relief Program
(SIGTARP); Assistant Director in Charge James W. McJunkin of
the FBI’s Washington Field Office; Michael P. Stephens, Deputy
Inspector General of the Department of Housing and Urban Development
(HUD-OIG); Jon T. Rymer, Inspector General of the Federal Deposit
Insurance Corporation (FDIC-OIG); Steve A. Linick, Inspector
General of the Federal Housing Finance Agency (FHFA-OIG); and
Victor S. O. Song, Chief of the Internal Revenue Service-Criminal
Investigation (IRS-CI).

On April 19, 2011, after a 10-day trial, a federal
jury found Farkas, 58, of Ocala, Fla., guilty of 14 counts,
including one count of conspiracy to commit bank, wire and securities
fraud; six counts of bank fraud; four counts of wire fraud;
and three counts of securities fraud. According
to court documents and evidence presented at trial, Farkas and
his co-conspirators engaged in a scheme that misappropriated
more than $1.4 billion from Colonial Bank’s Mortgage Warehouse
Lending Division (MWLD) in Orlando, Fla., and approximately
$1.5 billion from Ocala Funding, a mortgage lending facility
controlled by TBW. Farkas and his co-conspirators misappropriated
this money to, among other things, cover TBW’s operating expenses.
The fraud scheme contributed to the failures of Colonial Bank
and TBW.

Six other individuals have pleaded guilty and have
been sentenced for their roles in the fraud scheme. Catherine
Kissick, a former senior vice president of Colonial Bank and
head of the MWLD was sentenced to eight years in prison. Desiree
Brown, the former treasurer of TBW, was sentenced to six years
in prison. Paul Allen, the former chief executive officer of
TBW, was sentenced to 40 months in prison. Ray Bowman, the
former president of TBW, was sentenced to 30 months in prison.
Teresa Kelly, a former operations supervisor for Colonial Bank’s
MWLD, and Sean Ragland, a former senior financial analyst at
TBW, were each sentenced to three months in prison.

The Securities and Exchange Commission (SEC) has
civil actions pending against Farkas, Brown, Kissick, Kelly
and Allen in the Eastern District of Virginia.

“Lee Farkas’ boundless greed ultimately led not to a life of
luxury, but to a prison cell,” said Assistant Attorney General
Breuer. “Mr. Farkas orchestrated a fraud of staggering proportions,
the effects of which are still being felt by the thousands of
former employees of TBW and Colonial Bank, and shareholders
of Colonial BancGroup. From a $28 million private jet and vacation
homes in Maine and Key West, to expensive antique cars and restaurants,
Mr. Farkas plundered his company and Colonial Bank to prop up
his failing business and to feed his ostentatious lifestyle.
When greed and risky behavior lead individuals to break the
law, we will do everything in our power to investigate, prosecute
and punish those responsible.”

“Today’s sentence ensures that Lee Farkas will spend the rest
of his life in prison and is just punishment for a man who pulled
off one the largest bank frauds in history,” said U.S. Attorney
MacBride. “Between 2007 and August 2009, as the country faced
one of the worst financial crises in recent history – largely
sparked by fraudulent mortgage-related transactions – Farkas
ramped up his scheme to rip off banks through sales of fake
mortgage assets and by double-and triple-selling mortgage loans.
By causing the failure of Colonial Bank and TBW, two significant
players in the mortgage market, Farkas’s scheme affected those
at the heart of the financial crisis, including major financial
institutions, government agencies, taxpayers, and employees
and investors.”

According to
court documents and evidence presented at trial, the fraud
scheme began in 2002, when Farkas and his co-conspirators
ran overdrafts in TBW bank accounts at Colonial Bank in order
to cover TBW’s cash shortfalls. Farkas and his co-conspirators
at TBW and Colonial Bank transferred money between accounts
at Colonial Bank to hide the overdrafts. Evidence presented
at trial showed that after the overdrafts grew to more than
$100 million, Farkas and his co-conspirators covered up the
overdrafts and operating losses by causing Colonial Bank
to purchase from TBW over time more than $1.5 billion in
what amounted to worthless mortgage loan assets, including
loans that TBW had already sold to other investors and fake
pools of loans purportedly being formed into mortgage-backed
securities. Farkas and his co-conspirators caused Colonial
Bank to report these assets on its books at face value when
in fact the mortgage loan assets were worthless. By August
2009, approximately $500 million in fake pools of loans remained
on Colonial Bank’s books.

According to
court documents and evidence presented at trial, Farkas and
his co-conspirators at TBW also misappropriated more than
$1.5 billion from Ocala Funding. Ocala Funding sold asset-backed
commercial paper to financial institution investors, including
Deutsche Bank and BNP Paribas Bank. Ocala Funding, in turn,
was required to maintain collateral in the form of cash and/or
mortgage loans at least equal to the value of outstanding
commercial paper.

Evidence presented
at trial established that Farkas and his co-conspirators
diverted cash from Ocala Funding to TBW to cover its operating
losses, and as a result, created significant deficits in
the amount of collateral Ocala Funding possessed to back
the outstanding commercial paper. To cover up the diversions,
the conspirators sent false information to Deutsche Bank,
BNP Paribas Bank and other financial institution investors
and led them to falsely believe that they had sufficient
collateral backing the commercial paper they had purchased.
When TBW failed in August 2009, the banks were unable to
redeem their commercial paper for full value. Farkas and
his co-conspirators also caused approximately $900 million
in loans to be held on Colonial Bank’s books when in fact
the loans had already been sold to Freddie Mac and other
investors.

According to
court documents and evidence at trial, in the fall of 2008,
Colonial Bank’s holding company, Colonial BancGroup Inc.,
applied for $570 million in taxpayer funding through the
Capital Purchase Program (CPP), a sub-program of the U.S.
Treasury Department’s Troubled Asset Relief Program (TARP).
In connection with the application, Colonial BancGroup submitted
financial data and filings that included materially false
information related to mortgage loans and securities held
by Colonial Bank as a result of the fraudulent scheme perpetrated
by Farkas and his co-conspirators. Colonial BancGroup’s
TARP application was conditionally approved for $553 million
contingent on the bank raising $300 million in private capital.

Evidence at
trial established that Farkas and his co-conspirators falsely
informed Colonial BancGroup that they had identified sufficient
investors to satisfy the TARP capital contingency. Farkas
and his TBW co-conspirators diverted $25 million from Ocala
Funding into an escrow account and falsely represented that
the money was on behalf of capital raise investors. Farkas
and his TBW co-conspirators caused Colonial BancGroup to
issue a false and misleading financial statement to the SEC
and a press release announcing the success of the capital
raise. Ultimately, Colonial BancGroup did not receive any
TARP funds.

Evidence at
trial also established that Farkas and his co-conspirators
caused Colonial BancGroup to file materially false financial
data with the SEC regarding its assets in annual reports
contained in Forms 10-K and quarterly filings contained in
Forms 10-Q. Colonial BancGroup’s materially false financial
data included overstated assets for mortgage loans that had
little to no value that Farkas and his co-conspirators caused
Colonial Bank to purchase. Farkas and his co-conspirators
also caused TBW to submit materially false financial data
to the Government National Mortgage Association (Ginnie Mae)
in order to extend TBW’s authority to issue Ginnie Mae mortgage-backed
securities.

According to
court documents and evidence presented at trial, Farkas also
personally misappropriated more than $38.5 million from TBW
and Colonial Bank to finance his lifestyle, including purchasing
multiple homes, scores of cars, a jet and sea plane, and
restaurants and bars.

In August 2009, the Alabama
State Banking Department, Colonial Bank’s regulator, seized
the bank and appointed the FDIC as receiver. Colonial BancGroup
also filed for bankruptcy in August 2009.

“During the housing and financial crisis, while many American
taxpayers struggled just to keep their heads above water, Farkas
lived in the lap of luxury using the more than $38 million that
he stole from TBW and Colonial Bank,” said Acting Inspector
General Romero of SIGTARP. “Farkas used the stolen money to
buy a jet, expensive antique and collector cars including a
Rolls Royce, and multiple vacation homes, all while masterminding
a fraud of stunning scope. His fraud began to unravel when
he tried to obtain TARP funds to fill the billions of dollars
of holes at TBW and Colonial Bank. He failed and his fraud
was discovered by SIGTARP and its law enforcement partners.
Shameless in his duping of investors and regulators, he attempted
to deceive taxpayers. The judge’s sentence today makes it clear
that Farkas will leave his lavish lifestyle behind and spend
his golden years locked up in prison.”

“Through his scheme, Lee Farkas and his co-conspirators victimized
innocent people and in the process their actions led to the
collapse of two major U.S. financial institutions, no doubt
a contributing factor to the nation’s financial downturn,” said
Assistant Director McJunkin. “Today’s sentence does not make
the victims whole, but it does punish the major architect of
these crimes.”

“Lee Farkas was the mastermind behind one of the largest fraud
schemes in history involving a mortgage lending company. For
more than eight years, Farkas perpetuated his scam to defraud
banks, regulators and taxpayers,” said Deputy Inspector General
Stephens of the HUD-OIG. “We remain firmly committed to rooting
out fraud at all levels of an institution – from the bottom
to the very top – and holding those who engage in such destructive
activity ultimately accountable to the American people.”

“We are pleased to join our colleagues in announcing the sentencing
of Lee Farkas, whose actions contributed to the failure of Colonial
Bank, causing a $4.2 billion loss to the FDIC’s Deposit Insurance
Fund,” said Inspector General Rymer of the FDIC-OIG. “We appreciate
the collaborative relationships with law enforcement partners
that led to the successful outcomes of this case, one of the
largest bank fraud prosecutions of our time. We also acknowledge
the efforts of our FDIC colleagues, who, acting in their receivership
capacity, assisted the prosecution in unraveling the complexities
of this fraud. The American public needs to know that those
who undermine the integrity of the financial services system
will be held accountable. We are committed to helping maintain
confidence in the financial system, ensure the safety and soundness
of FDIC-insured institutions, and protect the viability of the
insurance fund.”

“In the midst of the worst housing finance crisis since the
great depression, Lee Farkas led a scheme that defrauded Freddie
Mac and, in turn, the American taxpayers who have invested over
$63billion in Freddie Mac to cover its losses,” said Inspector
General Linick of the FHFA-OIG. “Today’s sentence makes it
clear that mortgage-related fraud will not be tolerated.”

The case is being prosecuted by Deputy Chief Patrick
Stokes and Trial Attorney Robert Zink of the Criminal Division’s
Fraud Section and Assistant U.S. Attorneys Charles Connolly
and Paul Nathanson of the Eastern
District of Virginia. This case was investigated by SIGTARP,
FBI’s Washington Field Office, FDIC-OIG, HUD-OIG, FHFA-OIG and
the IRS-CI. The
department recognizes the substantial assistance of the SEC.
The department also recognizes the assistance of the Financial
Crimes Enforcement Network (FinCEN) of the Department of the
Treasury.

This prosecution was brought in coordination with
President Barack Obama’s Financial Fraud Enforcement Task Force.
President Obama established the interagency Financial Fraud
Enforcement Task Force to wage an aggressive, coordinated and
proactive effort to investigate and prosecute financial crimes.
The task force includes representatives from a broad range of
federal agencies, regulatory authorities, inspectors general
and state and local law enforcement who, working together, bring
to bear a powerful array of criminal and civil enforcement resources.
The task force is working to improve efforts across the federal
executive branch, and with state and local partners, to investigate
and prosecute significant financial crimes, ensure just and
effective punishment for those who perpetrate financial crimes,
combat discrimination in the lending and financial markets,
and recover proceeds for victims of financial crimes. For more
information about the task force visit:www.StopFraud.gov.